MAY 01, 1965 by HANS SENNHOLZ
Dr. Sennholz is head of the Department of Economics, Grove City College,
Suppose that an entrepreneur with a sense of scenic beauty builds a million-dollar motel on the downstream side of a dam that harnesses a wild river for the needs of man. Shall the dam’s owners, by reason of that motel, henceforth claim credit for $1 million of annual flood damage prevention, and thereby justify further investment in the dam?
The Tennessee Valley Authority seems to figure that way. From the Report of the Chief Engineer for 1963 we find that "at
The annual flood damage figure is calculated with the help of an appraisal curve that shows the recorded floods and the economic damage they would do if they occurred today without regulation by TVA dams. Every few years the curve is lifted to reflect new construction and higher values. Thus, the curve informs us that, according to 1961 values and state of development, damages averted in fiscal year 1963 amounted to some $113 million at
The 1963 edition of Facts about TVA Operations further reveals that "the Federal government is sole proprietor of an electric system which at the end of the fiscal year 1962 had a net worth of $1.8 billion, well over half a billion more than the $1.2 billion Treasury investment in the system." (p. 2) The adjoining income statement reveals a net income of $56.2 million for 1962, and $51.6 million for 1961.
Let us assume that this net income figure is correct, although the statistical and bookkeeping procedures cast grave doubt on its reliability. Every student of accounting and every investor knows that the capitalized value of a company with $56.2 million net income usually is less than $1 billion. Even with an assumed yield as low as 6 per cent, the market value of the TVA power system would be only $937 million. Yet, bear in mind that TVA’s total investment for all programs amounts to $2,581 million, including a "nonpower investment" of $652 million. (p. 2)
A bit later in the same report we find that "in the Tennessee Valley the operating costs per kilowatt-hour for producing, transmitting, and distributing electricity are about half the average for the Nation’s private utilities. These costs are unaffected by taxes and interest—factors sometimes given as the reason why rates are low in the
The preceding page, however, had seemed to say the very opposite in enumerating the TVA benefits to the Federal government: "Despite the fact that most of the power systems in the Tennessee Valley region are exempt from Federal income taxes, the total financial benefits the Federal government receives from power operations are probably greater in this area than any other. Nearly half of all the power TVA sells goes to agencies of the Federal government, primarily the atomic energy plants at
Taxes and Costs
But the main reason for TVA’s low operating costs, we are told, is yet another: the wisdom of its managers to charge low rates which in turn reduce costs! Here is the explanation by TVA’s Director of Information: "The region does, of course, have low-cost hydroelectric power. And large amounts of coal in or near the area. But more important are the economies that TVA and the distributors accomplish through the mass production that is achieved by giving primary concern and constant attention to keeping rates as low as possible to encourage the widest and most abundant use of electricity. It is generally accepted that low costs can produce low rates. The opposite also is true: low rates can produce low costs." (p. 5)
There follows a table of comparison of TVA costs with investor-owned utilities. In operation and distribution TVA costs are said to be 45 per cent of investor-owned utilities; in transmission and distribution, 35 per cent; in collection and customers accounting, 30 per cent; sales and demonstration, 25 per cent; administration overhead, 30 per cent; and finally, depreciation, 70 per cent. Altogether, TVA claims to operate at 45 per cent of the costs of investor-owned utilities.
To discover what accounts for this amazing comparison, we must understand the TVA method of cost allocation. TVA announces construction of "multiple-use dams" and then charges 22 per cent of the construction costs and 27 per cent of its common costs to "navigation," 14 per cent of construction and 31 per cent of overhead to "flood control," and only 64 per cent and 42 per cent respectively to "electric power." (p. 10)
Investor-owned companies, however, have no way to remove millions of dollars from cost accounting. They build dams whose purpose is flood control, and yet every penny spent constitutes power cost.
"A Competitive Challenge"
This competitive challenge to individual enterprise is emphasized throughout the pages of Facts about TVA Operations. The following• passage is indicative: "The effects of competition by comparison are apparent beyond the limits of the Valley region. Adjacent utility companies found that rate reductions which they initiated because of TVA’s influence helped to bring rapid increases in the home use of electricity. The closer private utilities are to the Valley area the lower their residential rates tend to be. Similarly, rural electric cooperatives pay lower wholesale rates for electric power the closer they are to TVA and to the most nearly comparable other area, the
The truth is that in recent years most privately-owned utilities have reduced their rates because of improved technology and rising productivity. Even in states where coal, oil, or gas have remained the most economical fuel, electricity has become an effective competitor. And it should not be surprising that despite such rate reductions, most utilities now show higher earnings than prevailed in the depression years of the late thirties. Yet, TVA would take all the credit!
Perhaps the most enlightening of all the Facts about TVA Operations is to be found in the concluding passages. While the report claims exceptionally economical operation in all TVA endeavors and thus "justifies" the Federal expenditures through extraordinary returns and benefits, it con-eludes that the
In the final analysis, this study concerns persons, and not things. When we speak of the socialization of the electrical industry, we are, of course, referring to persons. Electricity doesn’t care who or what produces it. In a like manner, when we speak of controlled production or controlled prices, we really mean controlled persons. Under a controlled economy, it is persons—not things—who are told by government what they must or must not do. This coercion of individual citizens is the vital issue. And in the long run the individual consumers of electricity have just as much at stake in this matter as do the private producers of electricity.
Dean Russell, The TVA Idea